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ULIP: Overview

Unit Linked Insurance Plans popularly known as ULIP came mostly after the privatization of Insurance industry. Private players launched ULIP to capture the market share, as it was difficult for them to beat the LIC  in traditional plans, particularly in bonus rates. ULIP plans are market related plans and risk of investment is borne by the policyholders. Policyholders have the right to choose the investment option available in the plan i.e. from 100 % debt to 100% equity.  ULIP plans are more flexible and more transparent. It gives flexibility to select the premium paying term, one can select and switch to fund available in the plan. The sum assured can also be decided on the basis of one's need. The plans are more transparent as the details of the fund investment are available easily. NAV of the fund is also declared regularly. One can easily track the performance of the fund opted and also can be compared with the bench mark and also with other funds of mutual fund. The most important part is that ULIP should match with your both insurance and investment needs. The plans are available in regular premium mode and also as single premium. 
After the new guidelines from 1.9.2010, one has to compulsorily pay premiums for at least five years in case of regular premium plans. There are no surrender charges after completion of five years. The charges are also restricted to 3% in case of plan of more than 10 years and 2.25% in case of plans with less than 10 years. Fund management charges are also restricted to maximum of 1.35% p.a. One can also make additional lump sum investment by using the facility of top up premium. It is also important to understand the impact of different charges levied under ULIP plans.  
The major charges levied in ULIP Plans are:
  1. Allocation charges: 
    This charge is a charge as percentage of premium paid. Allocation Charge is very high in initial years mostly in first year and then it comes down to 2% or even nil in later years, depending on which plan you choose.

  2. Policy Administrative Charges:
    This charge is either a fix charge expressed in absolute money terms or expressed as percentage of either premium or insurance cover. The insurance companies design these charges very smartly. In some plans these charges increase by certain percentage every year.

  3. Surrender Charges:
    Liquidity is the major factor in deciding any investment avenue. Therefore, you should also know surrender charge, before you buy an insurance plan. If you have not paid minimum 5 years premiums, the surrender charge will be much higher. As per new guidelines of IRDA, there should not be any surrender charges after premiums have been paid for 5 years. 

  4. Mortality Charges: 
    This charge is nothing but the cost of insurance cover you have opted for. Mortality charges are levied as per the current age of the insured and increase every year as age increases. Mortality Charges are deducted monthly in ULIPs by canceling equivalent number of units from units accumulated in your account.

  5. Fund Management Charges:
    This charge is levied as percentage of the total fund value. As per new guidelines by the IRDA, this cannot be more than 1.35% in ULIP Plan.
  6. Guarantee Charge:
    As the name itself suggests this charge is levied whenever there is guaranteed returns offered in the ULIP plan at the end of the term. All 7 year highest NAV guaranteed plan have  these charges inbuilt in the plan.

  7. Discontinuance Charge:
    This charge is levied if any premium is not paid during the first 5 years of the policy. These charges are mostly expressed in percentage terms of the annual premium or fund value subject to minimum and maximum of certain amount.
  8. Miscellaneous Charges:
    These charges are levied for any change request be it change of address, change in nominee, and change in premium frequency or for partial withdrawal. The charge is generally between Rs. 100 to Rs. 250 per transaction during the year.

  9. Switching Charges:
    Every insurance company allows you to switch your funds from one fund to another fund minimum 3 to 4 times in a year free of charge. After that they may charge you Rs. 100 for any additional switch you make. 

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